Transcript Chapter 1

Chapter 1
An Introduction to
Assurance and
Financial Statement
Auditing
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
LO# 1
The Study of Auditing
The study of auditing is different from other accounting
courses that you have taken in college because …
Technical,
analytical and
logical skills
More conceptual
in nature
Gather and
assess the
evidence against
assertions
Improving the
reliability of
information for
decision makers
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The Study of Auditing
Vocab and Language is unique
Relies on
Analytical and
Logical Skills
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LO# 2
The Demand for Auditing
and Assurance
The development of the corporate form of
business and the expanding world economy
over the last 200 years have given rise to
an explosion in the demand for assurance
provided by auditors.
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Why Audit ?
•Legal and Contractual Requirements
•Restrictive Covenants in Debt Agreements
•Modern Corporation Setup –
•Absentee Stockholders and profesional Managers
•Principal –Agent Relationships
•
Lack on information symmetry
•Conflicts of Interest
•Cost Effective Monitoring Device
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LO# 2
The Role of Auditing
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The Role of Auditing
OBJECTIVITY
INDEPENDANCE
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LO# 4
Auditing, Attest, and Assurance
Services Defined
Auditing
Attest
Assurance
Services
A systematic process of objectively
obtaining and evaluating evidence
regarding assertions about economic
actions and events to ascertain the
degree of correspondence between
those assertions and established
criteria and communicating the results
to interested users.
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LO# 4
Auditing, Attest, and Assurance
Services Defined
Auditing
Attest
Assurance
Services
Attest services occur when a
practitioner is engaged to issue or does
issue a report on subject matter, or an
assertion about subject matter, that is
the responsibility of another party.
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LO# 4
Auditing, Attest, and Assurance
Services Defined
Auditing
Attest
Assurance
Services
Independent professional services that
improve the quality of information, or
its context, for decision makers.
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LO# 4
Relationships among Auditing,
Attest, and Assurance Services
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LO# 4
Relationships among Auditing,
Attest, and Assurance Services
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LO# 5
Overview of the Financial
Statement Audit Process
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LO# 5
Audit Risk
Audit risk is the risk that the auditor may
unknowingly fail to appropriately modify his or her
opinion on financial statements that are materially
misstated.
The auditor’s standard
report states that the audit
provides only reasonable
assurance that the
financial statements do not
contain material
misstatements.
Reasonable assurance
implies some risk that a
material misstatement
could be present in the
financial statements and
the auditor will fail to
detect it.
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LO# 5
Materiality
Materiality is the magnitude of an
omission or misstatement of
accounting information that, in
light of surrounding
circumstances, makes it probable
that the judgment of a reasonable
person relying on the information
would have been changed or
influenced by the omission or
misstatement.
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Materiality
So What is Material
?
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LO# 5
Evidence Regarding
Management Assertions
Evidence that assists the auditor in evaluating
management’s financial statement assertions
consists of the underlying accounting data and any
corroborating information available to the auditor.
Relevance
Reliability
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LO# 6
Sampling: Inferences Based on
Limited Observations
Auditors use (1) their knowledge about the
transactions and/or (2) a sampling approach to
examine the transactions.
It would be too
costly for the auditor
to examine every
transaction.
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LO# 7
Major Phases of the Audit
The “404”
Audit
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So What is the End Product of A
Financial Statement Audit?
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LO# 8
Issue the Audit Report
The auditor’s report (audit opinion) is the main
product or output of the audit.
The standard unqualified (clean) audit report is the
most common type of report issued.
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LO# 8
Issue the Audit Report
The title line of the audit report includes the word
“Independent,” and usually, the report is addressed
to the stockholders of the company.
The audit report includes an introductory paragraph,
a scope paragraph, an opinion paragraph, an
explanatory paragraph referring to the audit of
internal control, the name of the auditor or audit
firm, and the date of the audit report.
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LO# 8
Issue the Audit Report
The auditor may issue a qualified opinion.
Suppose a client’s financial statements contain a
misstatement that the auditor considers material
and the client refuses to correct the misstatement.
The auditor will likely qualify the report, explaining
that the financial statements are fairly stated except
for the misstatement identified by the auditor.
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LO# 8
Issue the Audit Report
The auditor may issue an adverse opinion.
Suppose a client’s financial statements contain a
misstatement that the auditor considers so material
that it pervasively affects the interpretation of the
financial statements. Given such a situation, the
auditor will issue an adverse opinion, indicating that
the financial statements are not fairly stated and
should not be relied upon.
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The Unqualified Audit Report
Most Common
Audit Must be Conducted IAW Applicable
Standards
Auditor must be Independent
No Significant Limitations imposed on the
Auditor’s Procedures
Client’s F/S must be Free of Material
Departures from GAAP
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LO# 9
Auditing demands Logic,
Reasoning, and Resourcefulness
An auditor needs to understand both accounting and the
concepts and techniques of gathering and evaluating
evidence to assess management’s assertions.
Auditing is a fundamentally logical process of thinking
and reasoning – so use your common sense and
reasoning skills! As you learn new auditing concepts,
take some time to understand the underlying logic and
how the concepts interrelate with other concepts.
Being a good auditor sometimes requires imagination
and innovation.
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End of Chapter 1
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